"Democracy passes into despotism" - Plato

What stock-market junkie loves not liberty? It is one of humanity's Great Ideals. Not to mention a cornerstone of a modern capitalist economy.

One of the guarantors of liberty in the United States is the characteristic of its democracy to deliberate at length before making a decision; and once the decision is taken, discussion halts and majority rule is respected. This is an under-rated yet colossal power of a people confident in their political system.

Standing against this unified tide is to ask for trouble; and few do. The unfortunate by-product is that a lack of diverse and independent opinion of any serious influence becomes the norm. That's been a criticism made often enough, and especially by foreigners. One of the best known of these, de Tocqueville, made it especially memorably in Democracy in America, coining the phrase "tyranny of the majority".

To witness the upheaval wrought in US society over the morality of the country's Vietnam policy was to see this "tyranny" in action. Standing against the government's - and hence the majority's - line on this issue was not, for a long time, a comfortable place to be. The issue reverberates still in the argument that a President John Kerry will prove too soft on America's "enemies". His 1971 testimony that US soldiers committed atrocities has been portrayed by opponents as a betrayal, strictly for base political motives, of brother veterans. Without doubt, this idea has become one of the key struts against which is propped the Big Election issue of Terrorism.

Yet, is it terrorism that is the main threat today to all free nations?

Chances are that most who hit this blog and others of its type are entrepreneurial in spirit and live in a place where there are free elections providing meaningful choices; where there exist elected bodies of representatives wielding real power on behalf of citizens; where there is the rule of law under which every citizen is equal and entitled to due process; and where the press is free and a citizen can speak his mind without fear of reprisal. These are the chief characteristics of a free society and one in which free enterprise thrives. If history teaches us anything, it is to remember that these traits, together with the economic benefits derived from them, were hard-won.

The media, and many blogs, are replete with the implications of a Bush or Kerry victory. For investors it's a fertile field for speculation. But the stakes this time around are bigger than that; and everyone, capitalists included, ought to pay careful attention. Alzahr submits that the greatest danger facing free societies today is not the threat of terrorism, but how free societies react to the threat of terrorism. There is not only the safeguarding of life and limb to consider: it is, in fact, the fuzzier issue of ensuring security without disturbing core democratic rights earned over many years that is at the heart of the matter.

How are the guarantees, mores and customs of the world's various democratic, capitalistic systems to be honoured whilst calls are made for the implementation of apparently painless solutions in the name of "security"? These calls have already demanded, sometimes with success, the imposition of seemingly reasonable curbs on democratic privileges - especially the legal ones. Advocates for wrap the argument in "the ends justify the means" language; and it's easy to succumb so far as one's own interests are, it would seem, unaffected. But to agree these types of measures is is to step out onto a slippery slope endangering the basis of the entire system.

This Tuesday 2 November there will occur a renewal of a great political system, developed by the special circumstances, history, habits and customs of Americans. It was built on the ideals of the rights to life, liberty and the pursuit of happiness but is confronted today by a corrosive terror threat. Alzahr endorses no candidate; he hopes merely that whatever government assumes power is aware of danger without, and within.

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MD writes...

Flog Watch
An occasional tabulation of the main losses to UK plc: 2004 to date.


Westland Augusta plc; Buyer: Finnemeccanica
Abbey plc; Buyer: Grupo Santander
RMC plc; Buyer: Cemex
South Staffs Water plc; Buyer: First Islamic


Ah. None.

The City
Muted howls of anguish from the City this week. This correspondent was somewhat surprised that the “great and good” of the City thought that a UK banker would head up Abbey once the Spanish had taken over. What on earth were they thinking? The first rule of a takeover is that all the top jobs go to the winning side (maybe not immediately but over time). Titular local heads may be put in place but the power invariably lies behind the throne. It is something that the City and more importantly HMG would do well to learn.

So another great UK Company will shortly get gobbled up – in this instance the company has fallen (unopposed) not because it isn’t world class – it is; and not because it was too small to compete it isn’t. New readers please note that both are typical “investment banker” well argued (sic) justifications spouted when they want to flog something! The company is “truly international” to quote the Daily Telegraph. Unfortunately it appeared cheap to the Mexicans (ergo it probably was) and had the added benefit of allowing them to consolidate their foothold in Europe and elsewhere. No prizes for guessing what nationality senior staff will soon be; nor where HQ will migrate to. I’d guess Spain, since you asked, as they already have significant operations there.

Why do we keep doing this to ourselves? Moreover why do HMG and specifically the DTI and the Treasury continue to let it happen without so much as saying a word?

Shell recently announced a shake up to it's 100 year old corporate structure and in so doing capitulated to ill informed scribblers - mostly London based analysts and journalists in the City. Well chaps you got what you wanted, but will you still want to hold the shares? The new company Royal Dutch Shell plc to be based in the Netherlands (with a listing in London) is effectively a takeover by any other name of Shell Transport & Trading plc. No doubt the Dutch home (despite most activities currently being run out of London) is tax-driven (certainly not cost driven), and it means a significantly lesser influence for the UK. The operations in the UK will just become another rather small subsidiary. Whether all UK funds that currently hold shares will continue to be able to hold shares is a moot point. Quite what it will bring in terms of efficiencies will be limited; no management will have changed; and the company will continue to be run by committee - how else can it be run? UK shareholders should vote against this proposal when the opportunity comes in 2005.

Still no sense from HMG on this potentially devastating issue for many individuals and their families. Other than a vague suggestion that we should all save more and, by they way, put it into equities. My question is which and how if every thing of importance and quality has been sold overseas?

Clearly the “investment bankers” have nothing better to do than continue the slow drip of damaging nonsense about Sainsbury’s. Yes, there’s a job to do there but let the new team get on with it. Not more than a few months after the authorities have pronounced on the UK market than they’re stirring it up again suggesting that Wal-Mart (who have their own troubles in the UK) and/or the dream team of Leighton and Norman will return to front a leveraged bid. Why would they do any better? And why would the authorities allow further consolidation? Things have changed out there since Norman and Leighton last walked the aisles. Tesco is likely to remain number one but there will be at least two very strong challengers out there; pick any couple from Asda, Morrison’s and Sainsbury’s. By the way chaps – some market intelligence – Tesco too has empty shelves!

Very interesting short article on GM in the FT last Saturday (see John Plender’s column). Just a 0.25% downward revision in the assumptions for the pension fund rate of return which determines the contribution level (they assume 9%) would increase pensions liabilities to the equivalent of GM’s shareholder funds! One wonders how the auditors of GM and Ford can sign off the accounts on a going concern basis. Time for some major surgery, mostly in the US!

Makes you wonder how many other US companies use similarly heroic assumptions.

Those of us without a marketing qualification perhaps wondered why Unilever chose to concentrate on 400 brands. They perhaps silently questioned why so many fewer brands (they started with something like 1600) really were better; those of us who have actually lived abroad (and not necessarily so far from these shores) value the differences and more importantly the choice. The beauty of breadth is just that breadth – it does provide cover for when the mega brand collapses and, incidentally, makes nice niche market profits. Look at the success Premier Foods has made of allegedly minor “has been” British brands. I’m not suggesting there wasn’t some room for consolidation. But the world is a very big and diverse place and a focus on only 400 brands for a company as big as Unilever is too few!

Watch this space for an about turn on strategy. Remember - you saw it here first!

Signing off, stock pickers.

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Carnival of the Capitalists

Wednesday, October 27, 2004 | 0 comments »

This week Capital Chronicle was fortunate enough to have a piece published in the Carnival of the Capitalists feature hosted this time around by Barry Ritholtz of The Big Picture. Many thanks, Barry.

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RJH pens a "What if..." feature.

Moderator: Gentlemen, let's kick this off. Sigmund, let's start with you.

Sigmund Freud: Vell, Sviss, it is my belief zat ze yield curve may be regarded as the financial representation of investor's neurosis and its very construction reveals strong erotic roots. Initially strongly aroused, it stands erect and positive.

Swiss Toni: Ah, yes. It's obviously closely related to investing in equities. Which is, of course, really very much like making love to a beautiful women. You have to be able to look beyond the upfront sales data usually thrust out so invitingly and truly appreciate the assets. Take time to carefully explore and tease these out. Some may be hidden, so explore lovingly every nook and cranny of the accounts. Make sure you can live with any kinky off-balance sheet arrangements you might discover. Once fully aroused to its potential then - and only then - enter into and consummate the transaction with great gusto.

SF: Yet, Sviss, as ve find vith all neurotics, having "let ze monkey out of its cage" as you might say, investors detach their libidos with unending vissitudes surrounding their confabulated "is this still profitable?" thoughts. Zey turn their emotional cathexes into demons.

ST: Uh, quite, quite. But you know, Sigmund, investors are so often duped, strung-along and then jilted by cold hearted CFOs. It's hardly shocking they entertain doubts about their investments, is it?

SF: Vell, Sviss, zey also dupe themselves. This can be seen ven ze yield curve flattens indicating a divergence of investors' ego and super-ego. In fact, a sense of guilt begins to strain ze relationship between these egos. Eventually, ze point arrives at vich guilt and inferiority become entangled and ze yield curve inverts and takes the shape of an atrophied penis.

ST: [Pause] Never experienced that myself, of course. Man of vast todger reliability.

SF: Sviss, it's an universal theory. Your denial is merely a self-defence mechanism. Please, I can help you. Tell me about your mother.

Moderator: Ah, OK. The open beckons which is a natural point to draw this discussion to a close. Thanks so much to both of you and I hope you'll be listening in next time when Maximus of Gladiator fame, Mother Theresa and Don King debate the topic "Are integrity and profit-maximisation compatible?"

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The World's Greatest Forecaster

Thursday, October 21, 2004 | 0 comments »

It's a slow day in Bearland...

There's a scene in Butch Cassidy and the Sundance Kid where pursuers corner the pair on the edge of a cliff. Frantic, Butch says the only escape is to jump into the raging torrent 50+ metres below them. The Kid tells him he doesn't know how to swim. Butch, flabbergasted, replies

"Are you crazy?! The fall'll probably kill ya!"

Is this story relevant for forecasting? Can the Red Sox come back from 3-0 down? Is the West Indies about to become a test match cricket leviathan again? I don't/didn't/still don't know. It's just a great film moment and I've been waiting for an opportunity to mention it. But I do recall that Butch and Sundance made it alive out of that fix despite their pessimism.

The point is that I've felt bad since I wrote that piece on Wachovia's forecasting. I sniped and I want to do pennance and Feel The Pain every forecaster knows about. So I've built two models of extreme complication and plan to sell their output to all and sundry. If you're interested you'll need to be quick - I've already had the marketing departments of several investment banks on the phone. By the way, I also have a number of early 1990's computer hardware components on offer too.

Without further ado, I forecast that:

* on Tuesday 9 November West Texas light sweet crude (surprisingly refreshing both neat and with a chaser) will hit $60. It's at $54.92 now. Having noted the average fuel consumption of my Honda at idle; my recent electricity bills; how long the neighbours keep their lights on across the valley here; as well as numerous other things (sorry, I mean "variable factors") such as the impact of lint on the consumption rate of the cooling fan inside my pc, I am able to publish this astounding to-be fact with a high degree of statistical and personal confidence.

* And that's not all. I further forecast that on Monday 22 November the sterling/USD rate will breach the $1.85 level from the $1.8281 it's on as I type this. This is based on a revolutionary piece of econometric insight that accounts for the rate at which London tourists are increasingly ripped off by cambio booths. It includes a formula to establish a "leakage rate" calculated as the absence (in hourly terms of course, man) from the money supply of those coins used to operate the chemical toilets across the nation's capital.

Please don't abuse the comments option with expressions of admiration. Rather, I am interested in your own amazing economic forecasts. Special consideration will be made for the inclusion of estimates regarding the length of time Senator John Edwards is able to maintain his full smile at one sitting. But you must, I'm afraid, show full algebraic logic for admission into this category.

Prizes are forecast.

Yes, this is a serious post.

Have a nice day.

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Tattva, keen student of the Canadian economic, property and loan/mortgage scene, writes

Over the coming weeks Tattva would like to share his perspective on Canada - provided of course the great and wise RJH (you gotta humour him) allows me to. In which case it’s a case of “dearly beloved we are gathered here today to join RJH and Tattva in holy blogship”. [Editor: I must be a soft touch to put up with this].

Why would anyone care about, as Homer Simpson puts it, “America Junior”? Although Canada represents only 3% of the world’s stock market capitalization and does 87% of its trade with the US, it does have some huge attractions. [Editor: Pamela Anderson gag censored in the interests of good taste. But I did like it.] But seriously, it is one of the few countries running budget surpluses, has relatively cheap real estate and, as noted previously in Capital Chronicle, good growth prospects in wireless telecommunications. And that's but a few of the country's current attractions - there's also the politicians with a sense of humour to consider.

Interest Rising
RJH, amongst other things, asked for my views on the Canadian interest rate cycle. Are rates rising or falling? Did the Federal Government surplus imply downward pressure? Is the property sector generating decent yields? Take a deep breath, RJH, and calm down! Even my partner lets me get a word in edgewise. Well, sometimes anyway.

My definitive answer is yes and no [Editor: definitive? Imagine working with him]. Barring unexpected 9/11 type shocks the only way is up for interest rates. And no, I don’t believe the surplus will trigger interest rates reductions. There's also the pressure on the minority government to think about - they will be drawn more and more to bribing the electorate (sorry, please read "fulfilling promises") by increasing health and education spending and through tax cuts. This with the probable intent of calling a general election sometime in the next 24 months.

So ultimately these factors mean the debate really rests on when and by how much rates will rise. There are also the wildcards of Alan Greenspan’s interest rate decisions; the impact of oil prices; the strength of Canadian dollar; and the nation's economic growth.

[Editor: Don't know about everyone else, but I'm looking forward to Tattva's "definitive" guidance on the current attractions of the Canadian property sector.]

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During the scribe's university days he, a Close Friend and a few units of alcohol were watching a documentary in the genre of 60 minutes and Panorama. The topic centred upon the Dangers of Promiscuity.

During the course of the program there appeared on-screen a young man exhibiting a near complete want of physical attractiveness. He duly recounted his own sorry, cautionary tale and concluded with the words "And that's why I have decided to remain celibate."

Close Friend took a swig and then said:

"Like he has a choice."

That evening came back to the scribe reading the text of Alan Greenspan's remarks to the National Italian American Foundation on 15 October. Notable were the remarks made on the refining issues driving oil prices which neatly (plug alert) supplemented CC's own research. Mr Greenspan identified the lack of refining capacity for the heavier grades of crude as key, but was sanguine in saying free-market competition would come to the rescue in the "short-term".

Who wants to bet the farm on defining "short-term" when it comes to refiners deciding to make the large capex investments required to ease the bottleneck? It's not rocket science: finance guys don't make large capex outlays for short-term profits. They may first have to believe that oil price rises are going to remain persistently high - and that in a world where they have averaged $35.58 since 1970 in real 2004 dollars.

Put another way, this means that continued expansion and the avoidance of a meaningful crisis in the economies of the three largest oil consumers - the USA, Japan and China - must be perceived as a credible long-term proposition.

Mr Greenspan often gets sneered at these days as cheerleader. Yet, most of his utterances are educational, concise and worth reading if only to better understand How Things Work. Nonetheless, there is also truth in the idea that his speeches are skilfully spun to calm the fevered brows, in this case, of SUV drivers everywhere.

But at this juncture he has little choice, right?

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The Lion of Yonibana is back with a report on the St Louis debate.

To score the first half of the match up, or if you like, the middle rounds of the heavyweight bout for the American presidency between President George W Bush and Senator John F Kerry, a brief recap of the economic and political events in the week that ended on Friday October 8 2004 is required; as well as a recap of the outcome of the first debate in Miami. Do not forget, also, that we have framed our analysis of the debates using metaphors in the American football and boxing.

Three events preceding St. Louis offered opportunities and pitfalls for both men:

(1) the Department of Labor reported almost 100,000 new nonfarm jobs, a healthy figure, but short of both Bush administration forecasts and economists expectations, cementing the fact that the President will preside over a net job loss during his term, the first incumbent to do so in almost three-quarters of a century;

(2) Charles Duelfer, investigating weapons of mass destruction (WMD) in Iraq, concluded that sanctions had eliminated Saddam Hussein's WMD in Iraq, but that he retained the capability and intention to reconstitute the threat; and

(3) the former viceroy of Iraq, Paul Bremer, implicitly criticized the war in Iraq by saying the US did not have enough troops on the ground immediately after the fall of Baghdad. He did, however, later softened the blow with the declaration of unwavering support for the President's decision to invade.

I think it is fair to say that the most indelible image out of Miami was that of the challenger standing toe-to-toe with the President and offering a solid alternative to his policies. John Kerry finally made believers of his own crowd and actually forced many in the other or undecided camp to take a second look at him. Thus it was when we arrived in St. Louis.

The President was champing at the bit in St. Louis. Like most quarterbacks who find their jobs in jeopardy, he responded with fervor. Like most champions who are wounded by a blow, he came out with the intent to taking the fight to the challenger. He was more focused and forceful, had a point or counterpoint all evening, and took notes furiously. He clearly left the scowls in Miami and even offered a joke here and there. By the same token, I thought he was a bit edgy, overeager and bulldoggish. This was most evident with the use of the "liberal" label, reminiscent of 1988, when Bush Snr attacked Michael Dukakis throughout their contest with the same label. The key question for the President is this one: did he do enough to quiet the crowd and send the backup QB back to holding the clipboard?

As for John Kerry, his task was a bit simpler, albeit not simple. He had to make sure that the image that emerged in Miami was real. I thought Kerry kept up the pressure on the President and did not give him any significant opening. He continued to demonstrate his capability to analyze policy and offer solutions and did nothing to dissuade the crowd that he would be a capable commander-in-chief or backup QB if he is given the chance. Overall, he broke no significant new ground; but neither did he sit on his slight lead out of Miami. He did stumble a few times, none more notable than his answer to a question on abortion, which reinforced the perception that he is capable of taking both sides of an issue. For the challenger, the key question is this one: did he make the crowd believe that the Kerry they saw in Miami was real?

The first thought that came to my mind after watching the debate was this: did the thirty-two page agreement on the debate format include a formula to break a tie? I am sure there was none but I kept hoping they had one a la College football; continue in overtime - alternating possession - until a winner emerged.

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The data, just released, shows 96,000 jobs were added. Consensus was 150,000.

As this scribe wrote with some surprise on Tuesday, Wachovia were forecasting 250,000. Wachovia have been persistently and seriously over-optimistic with their forecasts for the last 3 months of nonfarm data. Time for a model rebuild.

Of note was the downward revision of August nonfarm jobs to 128,000 from 145,000; it is more manna for Kerry to go into tonight's debate with.

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Our guest columnist today rejoices in the moniker Lion of Yonibana. RJH's friend since Econ 101, he writes from South Carolina.

Two sports metaphors came to my mind after watching the first of the three American presidential debates. The analogies are not perfect, but they give a good explanation of the debate and its outcomes. The first comes from American football and the second, boxing.

In football, the quarterback is clearly the most celebrated position, with the incumbent perhaps receiving too much credit when things are going well and too much blame otherwise. But more relevant to my analysis is the fact that the backup QB is always the most popular guy in town when the team is not winning. I believe John Kerry'’s debate performance has made him the de facto backup QB on a team - Team USA - that is not on a winning streak in Iraq, the war on terror nor the economy. Until the debate he had only de jure status in the minds of most voters, including many in his own party. His performance may now result in more people to asking for him to be given an opportunity to lead the team.

There are two ways in which the first presidential debate resembled boxing. Firstly, when the bell rings in boxing, there is nowhere to hide; it is just two people, mano-a-mano, out to deliver as many crippling punches as possible; there are no handlers; the contestants must venture away from script; and they must react to unforeseen circumstances. Secondly, when a challenger and reigning champion meet in a boxing match, the champion almost always initially has the grace of the judges. He is given more room for error and the opponent must deliver a knockout blow or several series of highly damaging blows to wrest away the crown.

In my mind, the President was clearly hit damaging blows. But I would never question the heart of a head of state, whatever one may think of his policies. The President still has a reservoir of courage and strength from which to draw; he knows he has a fight on his hands and will come out swinging in St. Louis this Friday.

Equally, it would be wrong to underestimate the damaging capacity of hubris on the part of a challenger. It is natural to protect a lead, and Kerry, it has been said, has a history of gloating and overconfidence. If he is to win the match and not just a few rounds, he must put the afterglow of the first debate behind him and focus on how he can take some of the tactics of a winning performance in Miami into the final two rounds.

One of the lessons of Miami is that the candidates must ignore the press clippings and polls about where their strengths, and those of their parties, traditionally lie - for example, domestic policy for John Kerry and the Democrats, and foreign policy for President Bush and the Republicans. We saw John Kerry carve out a stake on foreign policy in Miami. But President Bush can surely counter the blow with a great showing in St. Louis - to be set in his preferred "town-hall" format - on domestic issues. It would be an interesting irony if the candidates and parties were vanquished in the subject areas traditionally considered to be their fiefs.

While it is late in the campaign itself, it is only the first quarter - or early rounds - in terms of the debates. There is still a lot to play for in Missouri and Arizona. But the first debate surely has greatly increased voter interest and will influence the final outcome.

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RJH writes...

Napoleon Bonaparte. Invaded Russia with 650,00 men. Returned with less than 40,000. Blamed the disaster entirely upon an early winter. The French call that culot (nerve) and, unsurprisingly, was yet another reason the fellow enjoyed some notoriety both at home and away.

Wachovia Securities. Forecasting nonfarm payroll gains of 250,000 in September (data to be released this Friday). Consensus is 150,000 to 155,000. Wachovia have hedged their number, blaming in advance this year's hurricanes as "a real wild card". More culot, given the Wachovia August and July predictions: both monthly calls were optimistic - wildly so for July - and significantly above consensus.

Having written about this previously I can confirm, again, that forecasting is just a teeny-weeny bit difficult. Especially when it's about the future. However, there is demand for it and those convinced by the analysis of the Wachovian chief and senior economists should without delay buy cfds, calls, Bush-futures and whatever else is for sale. Bet the farm if you have faith because an actual this Friday of 250,000 will cause more than an upward ripple. And it will win the Wachovia economists some Napoleonic-like fame.

But if they are spectacularly wrong and strong again, clients may soon forget them as: upon the death of Napoleon, George IV was told "Majesty, your worst enemy is dead." His reply was "Is she, by God!"

Touchingly, his thoughts had turned first to his Queen, Caroline.

Postscript: The data showed 96,000 jobs added. Time for a model rebuild. If they must.

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